Question

Explain TR, MR and AR and show as to how they are related to each other.

Answer 1

The concepts of Total Revenue (TR), Marginal Revenue (MR), and Average Revenue (AR) are essential to understand the revenue behaviour of a firm under different market conditions.

1. Total Revenue (TR): Total Revenue is the total income received by a firm from the sale of a given quantity of goods or services. 
   Formula: TR = Price × Quantity Sold
2. Average Revenue (AR): Average Revenue is the revenue per unit of output sold. It is calculated by dividing Total Revenue by the number of units sold.
   Formula: `AR = (TR)/Q`
   In most cases, especially under perfect competition, AR = Price.
3. Marginal Revenue (MR): Marginal Revenue is the additional revenue earned from selling one more unit of the commodity.
   Formula: `MR = (ΔTR)/(ΔQ)`
   It shows the change in total revenue when output is increased by one unit.

Relationship Between TR, AR, and MR:

1. Under Perfect Competition:
   1. Price remains constant, so AR = MR = Price.
   2. TR increases at a constant rate with output.
   3. The TR curve is an upward-sloping straight line, and the MR and AR curves are horizontal lines parallel to the X-axis.
      
2. Under Monopoly or Imperfect Competition:
   1. Price falls as more units are sold.
   2. AR > MR always.
   3. TR increases at a diminishing rate, reaches maximum, and then falls.
   4. MR falls faster than AR and can become negative.